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ACCT 405 Chapter 1 Problems: 1 3 5 9 10 11

Advanced Accounting

ACCT-405-14613 Chapter 1 Problems: 1 3 5 9 10 11

1. When an investor uses the equity method to account for investments in

common stock, cash dividends received by the investor from the investee should
be recorded as

1. A deduction from the investors share of the investees profits.

2. Dividend income.
3. A deduction from the stockholders equity account, Dividends to Stockholders.
4. A deduction from the investment account. (AICPA adapted)

3. Sisk Company has owned 10 percent of Maust, Inc., for the past several years.
This ownership did not allow Sisk to have significant influence over Maust. Recently,
Sisk acquired an additional 30 percent of Maust and now will use the equity
method. How will the investor report this change?
1. A cumulative effect of an accounting change is shown in the current income
statement.
2. No change is recorded; the equity method is used from the date of the new
acquisition.
3. A retrospective adjustment is made to restate all prior years presented using the
equity method.
4. Sisk will report the change as a component of accumulated other
comprehensive income.

5. When an investor elects the fair-value option for a significant influence

investment, cash dividends received by the investor from the investee should be
recorded as

1. A deduction from the investors share of the investees reported income.

2. A deduction from the investment account.
3. A reduction from accumulated other comprehensive income reported in
stockholders equity.
4. Dividend income.

9. Goldman Company reports net income of $140,000 each year and pays an
annual cash dividend of $50,000. The company holds net assets of $1,200,000 on
January 1, 2012. On that date, Wallace purchases 40 percent of the outstanding
stock for $600,000, which gives it the ability to significantly influence Goldman. At
the purchase date, the excess of Wallaces cost over its proportionate share of
Goldmans book value was assigned to goodwill. On December 31, 2014, what is
the Investment in Goldman Company balance (equity method) in Wallaces financial
records?

1. $600,000.
2. $660,000.
3. $690,000.
4. $708,000.
Cost of stock 600000
Income
2012 56000
accrued
 Dividend
2012 -20000
collected
Income
2013 56000
accrued
Dividend
2013 -20000
collected
Income
2014 56000
accrued
Dividend
2014 -20000
collected
Investment in Goldman 708000

10. Perez, Inc., applies the equity method for its 25 percent investment in Senior,
Inc. During 2013, Perez sold goods with a 40 percent gross profit to Senior. Senior
sold all of these goods in 2013. How should Perez report the effect of the intra-
entity sale on its 2013 income statement?
11. Sales and cost of goods sold should be reduced by the amount of intra-entity
sales.
12. Sales and cost of goods sold should be reduced by 25 percent of the amount of
intra-entity sales.
13. Investment income should be reduced by 25 percent of the gross profit on the
amount of intra-entity sales.
14. No adjustment is necessary.

11. Panner, Inc., owns 30 percent of Watkins and applies the equity method. During
the current year, Panner buys inventory costing $54,000 and then sells it to Watkins
for $90,000. At the end of the year, Watkins still holds only $20,000 of merchandise.
What amount of unrealized gross profit must Panner defer in reporting this
investment using the equity method?